DEFINITION of 'Inverted Spread'

A situation in which the yield difference between a longer term financial instrument and a shorter term instrument is negative. This is calculated by subtracting the longer term by the shorter term. In effect, the shorter term instrument is yielding a higher rate of return than the longer term instrument. This is in contrast to what is considered a normal market, where longer term instruments should yield higher returns to compensate for time.

BREAKING DOWN 'Inverted Spread'

For example, in the bond market, if you had a three-year government bond yielding 5% and a 30-year government bond yielding 3%, the spread between the two yields would be inverted by 2% (3% - 5% = -2%). The reasons behind this situation can vary and can include such things as changes in demand and supply of each instrument and the general economic conditions at the time.

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